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Servicing

Two settlements that could harm RMBS investors

More haircuts could be coming investors way, S&P says

high risk

Investors in residential mortgage-backed securities are far from out of the woods when it comes to resolving financial risk from RMBS investments.  

In fact, two recent court decisions involving RMBS reps and warrants litigation and put-back disputes over loans backing bonds that went bad spell both good and bad news for this particular segment. 

On the good side, a case out of New York could have the effect of limiting an influx of new cases.

Standard & Poor’s says the New York State Appellate Division – a jurisdiction with a great deal of influence in financial cases – issued a ruling that could limit the time plaintiffs have left to file RMBS cases.

S&P points out that the court’s Dec. 19th ruling holds that the statute of limitations for put-back claims begins on the deal’s closing date rather than on the date of the alleged failure to repurchase.

The ruling “could affect many pending lawsuits with similar SOL claims as well as limit new reps and warrants claims," according to S&P analysts.

The ratings giant says Ocwen’s recent settlement with the Consumer Financial Protection Bureau, which provides $2 billion in consumer relief and $127 million for a consumer relief fund is the latest in a long line of cases in which big banks like JPMorgan go ahead and settle claims with regulators. 

But when these settlements come en masse, it’s investors who take the hit, S&P points out.

"Most significantly for U.S. RMBS investors, and as is the case with the JPMorgan settlement, securitization investors would bear the losses that result from modifications to loans in securitizations," the S&P RMBS report claims. “The eventual negative or positive impact of loan modifications on any particular transaction will depend on the timing and extent of the modifications and the resulting loan performance."

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